Management needs to walk the ethics talk

In 2007, after a bread price-fixing scandal, Tiger Brands chief executive Nick Dennis did ‘the honourable thing’ and took early retirement. It was an inglorious end for one of South Africa’s top businessmen, who had sworn under oath to the Competition Commission that he knew nothing about his staff secretly colluding with other bread producers in raising the price of bread by 30c to 35c per loaf. The company took full responsibility for the fixing and paid an ‘administrative penalty’ of more than R98 million.

It also agreed to assist the commission in prosecuting remaining cartel members who had not cooperated with the investigation, and to implement a compliance programme to eradicate anti-competitive practices. Professor Mervyn King, who drafted the three King reports on corporate governance, said in an interview at the time that Dennis had done the right thing.
“As I understand, under oath, he (Dennis) said he had no knowledge – and one must accept that – but he said, ‘I accept ultimate responsibility as chief executive’ and fell on his sword, which I think is an honourable thing. King had sage advice for business executives. “The executive who is at the coalface of the business obviously has more knowledge about the business than the non-executive. The non-executive is very dependent on the information given to him or her at the board meeting in the pack.

“Unless he or she has reason to enquire – that’s the legal position – he or she is entitled to accept the veracity of the information. As soon as the director has reason to enquire, they must enquire – they can’t remain supine. “If they remain supine, then they incur responsibility – and can incur liability and damages.” King said the great non-executive director was a person of experience, who didn’t need the appointment or status, doesn’t need the appointment for money, had courage and asked intellectually naïve questions, which really started probing into matters.

“It’s not only what you get as the answer, it’s about watching,” he said. Strong ethical codes have been falling increasingly under the spotlight since 2001, after the collapse of US natural gas company Enron, due to widespread fraud. The topic came to the fore again in 2008 with the collapse of US financial services firm Lehman Brothers – one of the triggers of the global financial crisis. In October, protesters were camping out in Wall Street to protest against the attitude of corporate America, triggering similar rallies around the world.

In South Africa, it’s been the high-profile bread price-fixing case at Tiger Brands, an organs-for-cash scandal at Netcare and allegations of financial shenanigans at estate agency Wendy Machanik that have brought the issue of ethics into the public eye. The lack of ethics in business is an expensive problem. Global Financial Integrity, a Washington-based research group, calculates that R185 billion has illegally left South African shores since 1994. This excludes money lost to illegal activities, such as smuggling and money laundering, making the real figure much higher.

Cynthia Schoeman, the founder of The Ethics Monitor, says the perception among the public is that business ethics are getting worse. She says one of most serious outcomes of ethical failure is that a business, such as Wendy Machanik or News of the World – the British newspaper that was implicated in a spying and phone-tapping scandal – will shut down.

“I think mostly businesses are there to do business,” says Schoeman. “They are not there to cheat and steal and crook. They are committed to pursuing business ethically.” What is important for a business, she says, is to make ethics a conscious management focus and then to measure it and monitor it. “What gets measured, gets managed,” says Schoeman, who developed the Ethics Monitor Survey to measure ethics at firms. “This is especially pertinent for ethics.” Schoeman says the survey she uses asks a few simple questions and takes five minutes.

“Its confidential and anonymity is non-negotiable,” she says. “What the survey does is give business the chance to dissect results and take meaningful action.” Schalk Engelbrecht, an ethics specialist at auditing firm KPMG, says problems in firms often arise because of the distance between the top management and first-line employees. “Bigger companies are more prone to ethics problems, because it’s easier for a code of ethics to get lost in the firm,” he says. “In most of these companies, the problem is the disconnect. Employees feel ‘what is relevant to me doesn’t apply to senior guys’.”

Ethics, says Engelbrecht, is a relatively new challenge in a response to rampant Enron-type “casino capitalism”. “An organisation’s culture is its unique personality, and can include anything from dress codes to working hours.

An ethical organisational culture is one “in which employees are empowered and expected to act in ethically responsible ways, even when the law does not require it”. This kind of culture is established by aligning the organisation’s structures and processes with its habits and practices, and by grounding both structure and practice in the same ethical values. This can be achieved through ethics awareness campaigns, ethics training, positive role models and newsletters. Engelbrecht estimates that about 80% of executives are committed to ethics.

Lizelle Groenewald of the Ethics Institute of South Africa says a code of ethics has to be integrated throughout a company for it to be successful. “Many companies, including Tiger Brands, have embarked on ethics management programmes,” she says. “In Tiger Brands, the will is there from top management. If the will is not there from other levels, then one has a problem.” The institute, says Groenewald, assists companies in developing their own unique code of ethics. Companies then take the code and do awareness and training on all levels, to ensure people understand ethical standards.

“You have to drum the code into your staff. It is not a once-off. It requires constant intervention through e-learning, classroom training and theatre,” she says. And, like Dennis at Tiger Brands, when it comes to ethics, top management needs to ‘walk the talk’ and, at times, fall on their swords.